Principles of Macroeconomics Midterm
What is the difference between marginal values and average values?
Marginal values show the additional benefit or cost from consuming an additional unit of a good, while average values are the benefit or cost per unit of a good
How do economists distinguish between models that work and those that don't?
They test their models against real-world data
Microeconomics studies _________, while macroeconomics studies _________.
a small piece of the overall economy; the economy as a whole.
controlled experiment
a test where the person conducting the test only changes one variable to isolate the results
What is meant by randomization in the context of an economic experiment?
Subjects are assigned by chance, rather than by choice, to a group
Market demand is derived by __________.
fixing the price and adding up the quantities that each buyer demands.
The goal of optimization for an individual is to maximize
overall well-being
Optimization describes a situation where
people weigh costs and benefits when making a decision
Free riding occurs when _________ are out of sync with ___________.
people's private benefits; the public interest
Principle of Optimization at the Margin
states that an optimal feasible alternative has the property that moving to it makes you better off and moving away from it makes your worse off
technology is
the ability to use labor and capital more effeciently
optimum
the best feasible (possible, doable) choice
optimization is the process that describes _______
the choices that households make
comparative statics
the comparison of economic outcomes before and after some economic variable is changed
marginal cost
the extra cost generated by moving from one feasible alternative to the next feasible alternative
During the process of optimization economists believe that people are considering _________.
the feasibility of a choice, given the information available at the time.
What are the two components of technology?
the knowledge of how to produce new products; a more efficient means of production
productivity is ___________
the value of output that a worker generates for each hour of work
optimization in levels examines _________, while optimization is differences analyzes _________.
total net benefits of alternatives; the change in net benefits.
The opportunity cost of an activity is a measure of ___________ when you do that activity.
what is given up
positive questions ask
what is or what will be
Causation or Correlation -More ______ and ______ crime rates is likely to be ________. -More _____ and ______ employment levels is likely to be causation. -The length of women's skirts and stock market performance is likely to be _______.
-police officers; lower; causation -economic growth; higher; causation -correlation
The GDP deflator is calculated using ____________.
(nominal GDP/Real GDP) x 100
Which of the following is subject to the free-rider problem?
-Public libraries. -National security. -A neighborhood watch
What policies can be used to raise real GDP in a country?
-raise physical and human capital -improve efficiency in the allocation of resources -increase technology
Which of the following will be considered a final good in the calculation of U.S. GDP? A. Foot massages at spas in California. B. School supplies purchased by a local school board. C. Canned foods purchased by a grocery store D. Transmissions manufactured in Alabama for Ford's range of F-series pickup trucks.
A and B
comparative statics
A change in an outcome, such as consumption, that results from a change in a factor, such as the price
Free Rider Problem
A situation where public goods are under-provided or not provided at all because individuals are able to consume the good by paying little or nothing towards the cost
There is a proverb "anything worth doing is worth doing well." Do you think an economist would agree with this proverb?
No, because the marginal cost of extra effort may be greater than the marginal benefit
How does the sample size affect the validity of an empirical argument?
The larger the sample size the better
The national income accounting identity associated with the expenditure-based accounting method is represented by ___________.
Y = C + I + G + X - M
formula for the aggregate production function
Y = F (K , H)
marginal analysis
a cost-benefit calculation that studies the difference between a feasible (possible) alternative and the next feasible alternative
The concept of opportunity cost would explain whether someone chooses to drive, take a cab, take a bus, or walk to school or work because someone with ___________.
a high wage is more likely to drive or take a cab to work because his time is worth more.
The definition of economics states that it is the study of how
agents choose to allocate scarce resources and the impact of those choices on society.
natural experiment
an empirical study in which some process out of the control of the experimenter has assigned subjects to control and treatment groups in a random or nearly random way
To say that economists use the scientific method means that they are using ___________.
an ongoing process to develop models of the world and then test and evaluate those models
physical capital is
any good, including machines and buildings, used for production
Policy decisions made by the government are analyzed by _________.
both microeconomics and macroeconomics.
In a perfectly competitive market, sellers _________ and buyers _________.
cannot charge more than the market price; cannot pay less than the market price.
Production-based accounting is used to estimate GDP by ____________.
computing for each firm the difference between sales revenue and the purchase of intermediate products, then summing this difference across all firms; summing each firm's value added to the production process.
Comparing a set of feasible alternatives and picking the best one is an optimization process called _________.
cost-benefit analysis.
human capital is
each person's stock of skills to produce output or economic value
Empiricism describes a situation where
economists use data to analyze what is happening in the world
Items are classified as final goods only if they are the ________ in a chain of production.
end product
For a market to be in equilibrium, three conditions must hold. -The amount produced by sellers must be _______ the amount purchased by buyers. -The costs of making a product must be _______ the final price at which the product sells. -Buyers must place a value on the uses of the product that is _______ the cost of buying the product.
equal to; less than; greater than
Productivity varies across countries because
human capital, physical capital, technology
income per capita
income per person = (nations aggregate income/number of people in country)
behavior economics
jointly analyzes the economic and psychological factors that explain behavior
In a perfectly competitive market, if one seller chooses to charge a price for its good that is slightly higher than the market price, then it will _________.
lose all or almost all of its customers
Equilibrium describes a situation where
no one would benefit from changing his or her behavior
Causation
often occurs when one thing directly affects another through a cause-and-effect relationship
A country's gross domestic product would exceed its gross national product when the ____________.
production of foreign-owned factors operating in the domestic economy exceeds the production of domestically-owned factors operating abroad.
The Law of Demand states that as the price of a good increases, ceteris paribus, the ________ decreases. This can be shown graphically with a _________ demand curve or numerically in a table using a _________. The relationship that exists between these two variables can be described as _______.
quantity demanded; downward-sloping; demand schedule negatively related
in the aggregate production formula Y stands for _______, K is the _______, H is the________ and F is best described as _________.
real GDP; physical capital stock of the nation; efficiency units of labor used in production; a relationship between the variables.
signaling argument
says that college graduates earn more because a college degree is a signal to employers that a job applicant is diligent, intelligent, and persevering
human capital argument
says that high schools and colleges teach people valuable skills, and employers are willing to pay higher salaries to attract people with those skills
Does the shape of the market demand curve differ from the shape of an individual demand curve?
No, they both tend to be downward-sloping curves.
Economics, anthropology, psychology, sociology, and political science all study human behavior. Economics differs from these other social sciences because it also addresses these three key concepts: _________.
Optimization, equilibrium, and empiricism.